Being different pays

Even with historically high cattle prices, buyers are willing to pay more for cattle that reduce their risk, be it in terms of health, the ability to meet minimum performance requirements or verification supporting such claims. Though the range varies widely, a recent informal poll indicates (basis 550-lb. calf) age and source verification is worth zero to about $4/cwt.; weaning and preconditioning

Even with historically high cattle prices, buyers are willing to pay more for cattle that reduce their risk, be it in terms of health, the ability to meet minimum performance requirements or verification supporting such claims.

Though the range varies widely, a recent informal poll indicates (basis 550-lb. calf) age and source verification is worth zero to about $4/cwt.; weaning and preconditioning can bring nothing to more than $6/cwt.

That's essential to remember in a commodity business where costs are increasing faster than cattle prices and promise to surge further, thanks to an ethanol-based federal energy policy that intractably ties the cost of the nation's food to that of its fuel.

It's all about energy

Ethanol-fueled corn prices have already inflated U.S. retail food prices by $14 billion annually. That's a conservative estimate, according to a recent study conducted by the Center for Agricultural Affairs and Rural Development at Iowa State University (ISU).

The study evaluated two scenarios in a 10-year period ending in 2016. First, researchers looked at crude oil prices at $55-$60/barrel, which the study projects would result in U.S. ethanol production reaching about 15 billion gals. annually. That serves up the $14-billion increase in retail food prices.

If crude oil prices move to $65-$70/barrel, the study projects the potential increase in U.S. ethanol production at nearly 30 billion gals. annually. That pegs corn prices at about $4.42/bu. and the increase in annual retail food prices at $20 billion.

Under this latter scenario, the study estimates beef retail prices would increase 4% and production decline by 1.6%. Significantly, since the study projects that the price of dried distillers grains with solubles will closely track increasing corn prices, the impacts of such price increases are nearly as significant for beef and dairy as they are for hogs and poultry.

The study indicates that corn-yield gains would ultimately provide sufficient additional corn stocks to moderate grain price increases if corn-based ethanol production peaks at 14-15 billion gals. annually by 2010, when ethanol plants under construction come online. If so, the study projects corn prices would peak at about $3.43/bu. in 2009 before leveling off at $3.16/bu. by 2016. Ethanol production at that level would equate to about 10% of U.S. gasoline consumption.

Industry growth is tough

In effect, subsidizing ethanol and the corn going into it caps the cattle industry's ability to expand much, just as surely as any efforts to reduce current efficiency would.

According to a recent landmark economic analysis conducted by John Lawrence, director of ISU's Iowa Beef Center, cattle selling prices would have to increase 36% to cover the increase in costs if the industry quit using parasite control products, growth promotant implants, sub-therapeutic antibiotics, ionophores and beta-agonists.

Across all production segments, this analysis indicates these technologies produced a combined direct cost savings to producers of $365/head of beef cattle raised. Keep in mind this is gross dollars not accounting for the cost using the technology.

Lawrence also analyzed these results using the Food and Agricultural Policy Research Institute (FAPRI) model of U.S. agriculture to estimate the impact on beef production, price and trade if these technologies weren't available. For the beef industry, the FAPRI model indicates:

14% smaller calf crop

18% reduction in total beef produced

180% increase in net beef imports

13.5% increase in retail beef prices

Pork and poultry production would expand to fill the void for domestic and export customers.

“Cattle prices (in this scenario) do increase, but not as fast as cost of production. Packers and feedlots adjust to maintain operating margins similar to current levels resulting in lower returns to beef cowherds and a smaller feedlot and packing industry. Pork and poultry production expand to fill this void for domestic and export customers,” Lawrence says. “The complete elimination of efficiency-enhancing technologies would result in high beef prices to all consumers, and the U.S. would need to import significantly more beef to meet its demand. The smaller beef industry would mean fewer cattle operations and less employment in rural communities.”

More cows and more acres would be required to produce less beef, rather than what has heretofore been cattle producers' enviable ability to feed more people with fewer cattle. Just as pumping more bushels of corn at the gas pump caps the number of cattle and the efficiency at which those cattle can produce protein.